T Stock: The New AT&T Looks Like The Old AT&T – And That’s Good

The story on AT&T (NYSE:T) used to go something like this: T stock has morphed into a diversified telecom and media company in recent years. The acquisition of DirecTV and Time Warner created a company that Alexander Graham Bell couldn’t possibly comprehend.

Source: Jonathan Weiss/Shutterstock

The DirecTV acquisition in 2015 was ill-timed, as it closed near the advent of the global streaming phenomenon. Subscribers have declined steadily since the acquisition. However, the satellite company provides strong free cash flow, which is important from a value stock perspective.

The 2018 acquisition of Time Warner (now WarnerMedia), which hasn’t yet proven itself a successful purchase, provided AT&T with industry-leading brands such as HBO, CNN, Warner Bros. and DC Comics.

AT&T is also the largest cellphone and mobile service provider in the United States with over 176.7 million subscribers.

The key advantage for T stock is cash flow — free cash flow, to be specific.  Although growth rates in most of its segments, and for the company overall, won’t be setting any records soon, the company generates a substantial amount of cash. For 2021, the company might generate $44 billion in operating cash flow and after $18 billion in net capex. That leaves over $26 billion in free cash flow to cover dividends, debt repayment and share buybacks.

The hefty dividend alone will cost about $15 billion (that currently yields approximately 7%), which leaves $11 billion for debt repayment. That is why most analysts aren’t worried too much about AT&T’s heavy debt load. Every dollar of debt repayment should accrete to equity shareholder value over time.

DirecTV Transaction

However that story changed on Feb. 25, 2021, when AT&T and private equity firm TPG Capital announced that they signed an agreement where to two companies will form a establish a new company named DIRECTV. This new entity will own and operate AT&T’s U.S. video business unit consisting of the DIRECTV, AT&T TV and U-verse video services.

AT&T will own 70% of the new DirecTV and TPG will own 30% when the transaction closes. If the transaction closes in 2021, AT&T expects to receive from $7.6 billion in cash and use that to pay down existing debt.

WarnerMedia and Discovery Merge

Then the story really changed on May 17,  when AT&T announced plans to merge WarnerMedia with Discovery Communications (NASDAQ:DISCA). This comes less than three years after AT&T acquired WarnerMedia (formerly Time Warner) for $85 billion. T shareholders will own 71% of the new company and DISCA shareholders will receive 29%. The new company will carry $15 billion in debt from Discovery and $43 billion in debt from AT&T.

The newly formed company will be a media and content goliath.

The New AT&T

What’s left for AT&T — is it now a shell of company with all its media businesses gone or spun-off?  Not quite.  Will be a global leader in 5G wireless, fiber backbone and telecom services. The company expects annual revenue growth in the low single digits, annual adjusted EBITDA and adjusted EPS growth in the mid-single-digit range and “Significantly increased financial flexibility to drive returns to shareholders, including:

  • “Expected increased capital investment for incremental investments in 5G and fiber broadband.  The company expects annual capital expenditures of around $24 billion once the transaction closes.  AT&T expects its 5G C-band network will cover 200 million people in the U.S. by year-end 2023. And the company plans to expand its fiber footprint to cover 30 million customer locations by year-end 2025.
  • “Significant debt reduction: Expect Net Debt to Adjusted EBITDA in the 2.6x range after transaction closes and less than 2.5x by year end 2023.
  • “The optionality to repurchase shares once Net Debt to Adjusted EBITDA is less than 2.5x.”
See also  GNUS Stock: Why Genius Brands Is Falling Despite Marvel News

Dividend Reset for T Stock

The company will lower its dividend to adjust to the new reality of its business segments’ different financial profile. AT&T stated that its dividend will be “resized to account for the distribution of WarnerMedia to AT&T shareholders. After close and subject to AT&T Board approval, AT&T expects an annual dividend payout ratio of 40% to 43% on anticipated free cash flow of $20 billion plus.

“The reset dividend will still be incredibly attractive relative to other dividend opportunities in the market,” said AT&T CEO John Stankey. “I would expect it will still be in the 95th percentile of dividend yields”

Conclusion

A refocused wireless, fiber and telecom services global telecommunications company without the burden and distraction of running complex media companies will likely be a good thing for T stock long-term. The sum of the WarnerMedia and DirecTV spinoffs  combined with the long-term value of AT&Ts remaining core business is likely much higher than todays price.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.comRagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.

View more information: https://investorplace.com/2021/06/the-new-att-looks-like-the-old-t-stock-and-that-may-be-a-good-thing/

View more information: Finance

Leave a Reply

Back to top button